Fundamentals and Exchange Rates: Evidence from ASEAN-5

Abstract

Utilizing the combined-form of PPP and UIP we estimate the cointegrating relations for ASEAN-5 economies. The study uses quarterly data over the period from 1980 to 2008. The findings reveal that exchange rate, interest rates and prices are cointegrated, implying that there is co-movement among them in the long run. We also find that the hypothesis – PPP augmented by interest rates forms a cointegrating vector – cannot be rejected. This piece of evidence is consistent with the capital enhanced equilibrium exchange rates (CHEERs) approach, which states that the deviations from PPP can be explained by the interest rates differentials. These evidences defiantly would provide the help in formulating exchange rate policies in ASEAN-5 countries.

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